Toy Story: How Wall Street Tries to Play You for a Fool

Today, I have a toy story for you.

It isn't a story about toys. Well, it is, but that part is tangential. This is a story about how Wall Street toys with you. And I use the term loosely. Because Wall Street is playing with your money. For the Street, it is a game. And its goal, just like the croupiers at Vegas casinos, is to keep you playing on the other side of its trades. Never forget. The Street is the dealer, and you are the mark.

So here's a story that I noticed just the other day that shows just how Wall Street toys with your emotions to keep you in the game and skim you as it distributes its inventory, its "stock in trade," to you.

It almost fooled me, too. But fortunately, I have seen its games before, and that experience along with my computer program made me a little too smart for the Street.

My Trading System Showed Me the Truth About MAT... Before Wall Street Stepped In

I noticed this story because it happened to a stock I had just added to my Daily Trades List on Tuesday, Oct. 24. That list is part of my Wall Street Examiner Pro Trader Market Updates.

Every day after the market closes, I run an algorithm that I wrote to screen 4,500 listed U.S. stocks for chart setups that look good for swing trades of three weeks to three months, both on the long side and the short side. That screen spits out anywhere from 20 to 50 charts every day that I then eyeball for the best-looking setups. I choose those that pass my eyeball test to be added to the list, either long or short.

In addition, I review the charts of all the stocks already on the list. On Monday, there were 30 - 14 longs and 16 shorts (which tells us that this is no longer a one-way market). As a result of that daily review, I adjust some stops or change some positions to "sell" or "buy to cover."

One of the stocks that popped up on my screen on Oct. 23 was toymaker Mattel Inc. (Nasdaq: MAT). That was a couple of days before its quarterly earnings call, which was horrendous. Now, this stock has been going to hell in a handbasket for years, but it had been trading dead in the water for weeks around $15 and a fraction. Very quiet.

Below you see one of my proprietary cycle charts. It looked like this on that day.

That evening, on Oct. 23, the algorithm generated a sell-short signal, and I liked what I saw, so I added it to our Daily Trades List as a short to be executed at 2 p.m. on Tuesday, Oct. 24. Here's how the list looked as published that morning.

So if you were tracking and following these trade suggestions, you read the update in the morning, and if you liked that idea, you set your online trading platform to short the stock at 2 p.m., or you entered it yourself at that time. At 2 p.m. that day, the price of Mattel was $15.36. That was our assumed order execution price.

Now, there are many ways that Wall Street manipulates us to do what's good for them, but probably bad for you. What happened next in this toy story was typical of how Wall Street manipulates you into saving it from its own stupid mistakes. Yes, as good as it is at skimming your capital for itself, it does really dumb things sometimes. But it has a bag of tricks to get you to help it out without you even suspecting that that's what is going on.

Here's what happened over the next few days.

First, the stock sat there around $15.50 through Thursday, Oct. 26. Then MAT had its earnings call and the slop hit the fan. So called "earnings" came in at $.09 per share against an expected $.57. But wait! There's more! Here's how MarketWatch put it in the after-hours on Thursday:

Mattel Inc. MAT, +0.69% shares tanked 20% late Thursday after the toymaker reported a surprise loss and plunging sales for the third quarter, blaming it on [the] Toys "R" Us bankruptcy, tighter retailer inventories, and "challenges" with its underperforming brands. Sales worldwide were down 13%, including a 22% decline in North American sales. The company also announced a cost-cutting plan and suspended dividend. Mattel said it lost $603 million, or $1.75 a share, in the quarter, versus a profit of $236 million, or 68 cents a share, in the year-ago period. Sales fell to $1.56 billion from $1.79 billion a year ago. Analysts polled by FactSet had expected earnings of 57 cents a share on sales of $1.8 billion. Among Mattel brands, sales of American Girl products fell 30%, while Fisher-Price sales fell 15%.

That speaks for itself. The stock closed at $15.37 on Thursday before the earnings call. It opened Friday at $12.89. "Woohoo!" said yours truly. Woohoo is a technical trading term used by short-term traders. It means "woohoo."

But alas, whenever you say woohoo, that's actually a warning sign that things are about to turn against you. In other words, "Fade your own emotions." Traders use the word "fade" to mean "go against that which seems obvious," like sell good news, or buy bad news.

How Wall Street Rigged the Game (and Why I Decided to Stay In)

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

By the close that day, the stock was back to $14. Still, not bad. We were up 9% on a cash basis in a week. Most traders use margin. For them, the profit would have been a handsome 18%.

But apparently a large dealer had gotten caught with its pants down. They were long on the stock. Too long for comfort. So what did they do? Right, they turned to their advertising and marketing department, aka the "research" department, to find a way to get the prop trading desk out of its predicament.

The rear-guard action started the very next day. For us shorts, it was pure abuse after the previous day's "woohoo." At the close that day, the stock was back to $15.58! Our "woohoo" trade had swung from a happy profit to a small but mournful loss after our giddiness of the day before.

Sometimes stocks do turn on a dime. So when this happens, we need to be careful not to let a reversal like this turn into runaway losses. I look at the chart and either decide to cover the short or hold. If the decision is hold, I look for an obvious level that, if broken, would indicate that we need to get out. In this case, it would have been around $16.25, just above the previous minor pivot high.

But I smelled a rat. Normally, I don't care about a stock's fundamentals, but because of the rat smell, I went searching for it. And BOOM, there it was. Bloomberg succinctly put it in its headline on Oct. 30: "Mattel Surges After Dismal Results Lead to Takeover Speculation".

Mattel Inc. gained the most in more than a year after its bleak quarterly results renewed speculation that the company may be better off as a takeover target.

Gerrick L. Johnson, an analyst at BMO Capital Markets, said on Monday that investors should "start looking at Mattel from a sale of the company perspective."

Mattel's shares tumbled in the wake of the report on Thursday, and its market valuation is now hovering around $5 billion. But its assets could be worth much more if there's a sale or breakup, Johnson said in a note. He has the equivalent of a "Buy" rating on the shares, which he expects to climb to $20.

Want reliable profits, month after month? Join Lee Adler's Sure Money, where Lee reveals where money's piling up, plus his best strategies for cashing in ahead of the crowd. Best of all, Lee's research is free – just click here to sign up.

OK. I've only been watching markets for about 50 years. So I kind of know Wall Street BS when I see it. That was clearly BS. It stunk. BMO Capital Markets is one of the Fed's primary dealers. As a dealer, it makes markets in hundreds of stocks. We don't have that type of specific dealer position data, but BMO's affiliate bank, Bank of Montreal, held 573,000 shares of the stock on Sept. 30. It had actually added 73,000 shares during the month when the stock was trading between $15 and $16.

The way I read this is that the bank had made a stupid bet and now it was looking for a way out. It wasn't alone. Some of its biggest and best clients were also long up the wazoo. Big institutions had added some 55 million shares to their long positions in MAT during September. So the bank's portfolio managers and the dealer arms traders turned to the "research" department and said, "Gee, fellows, can you help us out?" Only they probably weren't so polite.

So early in the morning of Oct. 30, suddenly this absurd "research" note appeared. It was plastered all over the mainstream media. To me, it smelled like the fix was in, but I felt strongly that it was bogus and would not be sustained.

To be safe, I did put in a stop, but way above the previous pivot high, setting it at $16.75. I was willing to risk a bigger-than-usual drawdown because I was watching the chart every day, and it was telling me to stay in.

Sure enough, the very next day the stock was on its way back down.

As I write, it is trading at $13.14, not far above its low of $12.71 the day of the earnings report. Here's the current chart. We're looking pretty good at this point.

Now, it may or may not be headed lower from here. I'll review the chart nightly for indications of whether to stay short or get out. But the lesson here is clear: Wall Street is not your friend. It exists only to profit for itself, largely by skimming your money. It wants you to do its bidding, and it will use any form of possible manipulation to do that.

The beauty of technical analysis (TA) is that it simply does not care about whatever beautiful stories Wall Street dealers and institutions are telling you to get you to take their inventory off their hands. It gives you a set of tools to make decisions independently of Wall Street's noise. TA's signals are not always right, and sometimes the analyst doesn't interpret them correctly, but the signals are objective, and in the right hands, TA will generate bigger profits more often than it generates losses.

If this type of thing interests you, please join me and follow these objective signals for short-term profits at The Wall Street Examiner Pro Trader Market Updates. I post my Daily Trades List update for you every weekday morning.

And now for a quick look at this week's LAMPP, also brought to you courtesy of my technical analysis and charting tools.

The LAMPP Shows the Real Story - a Continued Slide into Red Territory

The long-term LAMPP still has not flashed a red signal as the index hovers just above its 78-week moving average. This is a week-to-week situation. Over the next couple of months, the Fed will begin to remove cash from the system, and the Treasury will continue to issue a large supply of new debt. This should trigger a red signal within a few weeks.

Until it does, long-term investors can stay long, but we are playing with fire. I would continue to gradually raise cash by selling into rallies with the goal of raising a significant cash position by next March or even preferably January, when the ECB cuts its QE purchases in half.

The short-term LAMPP is still red. As we discussed last week, this signal looks wrong based upon the market averages, but the market averages don't tell the whole story. My short-term trade-picking algorithm continues to see about the same number of shorts as longs, and the shorts are doing just as well as the longs - and even better on some days. This shows that the market averages are going up on a narrowing base of supporting actors. So let the buyer beware.

Free Book for Money Morning Readers – Claim Yours Here

With the secrets you’ll find in this book, we’ve produced 89 chances to double, triple, and even quadruple your money in the past two and a half years – 42 chances this year alone!

Fun fact: You only have to double $500 eleven times to turn it into $1 million.

Click here to learn how you can claim your free copy today.

The post Toy Story: How Wall Street Tries to Play You for a Fool appeared first on Lee Adler's Sure Money.

About the Author

Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.

Read full bio